Deciphering the teased "How to Cash in on the $3.82 Per Barrel 'Reverse Oil Tax'"

Everyone hates taxes. Some of us don’t mind them as much as others, of course, or consider them a reasonable contribution toward common goals, but on April 15th no one who has to mail in an extra check to cover their taxes enjoys it.

So the idea that you can redirect a tax, and get the tax money coming to you instead of to the gummint, well, that’s naturally quite appealing. That’s the pitch from the Money Map Report folks … and if you subscribe to their newsletter, they’ll tell you how to collect your “reverse oil tax.”

Subscribe if you want, friends, but let us tell you what they’re really talking about first — then you can decide rationally and calmly, without the lure of hot secrets to be revealed (you can also see some reviews of the service from other Gumshoe readers here, or in the column to the right of this note). This pretty much functions as their “entry level” newsletter at Money Map Press, like almost all publishers they use this general, broad based letter to bring in new paid readers who are willing to pay a bit for advice, since folks who are willing to pay even a little bit for advice become a wonderful hunting ground for publishers who want to urge you to pay a bit more for “better” or more exclusive advice.

Sorry, I got off target again — what was our mission today? Right, to figure out what this “Reverse Oil Tax” is that they’re pitching. Here’s how they open the ad to get your attention:

“Over the next several months, the nation’s largest energy companies will begin paying a brand-new $3.82 per barrel oil surcharge – or approximately $47.7 million each and every month.

“That’s 712% higher than the current excise taxes levied by the state and Federal governments, on average, on a gallon of gasoline.

“And for the first time in history, this HUGE new surcharge, or ‘reverse oil tax,’ is NOT going to the Feds. Or to State governments.

“Instead, it’s flowing into the bank account of a small limited partnership – a partnership that controls the only existing pipeline capable of relieving the massive GLUT of crude oil now accumulating in storage tanks in Cushing, Oklahoma.

“And here’s the shocking twist few people know about:

“If you act very quickly, you can lock in YOUR share of the regular “reverse oil tax” payments for the next DECADE at least…”

A fair amount of that is poppycock, to be sure (especially the “first time in history” bit) — but there is some reality there. Folks who are accustomed to investing in Master Limited Partnerships that own oil pipelines probably recognize that that’s what we’re talking about here … let’s get a few more details from the ad to flesh it out:

“What if the oil companies were legally obligated to pay a brand-new $3.82 per barrel ‘energy tax’ that is being levied beginning May 17 – and a percentage of the revenue was passed from the limited partnership on to you in regular payments?

“Finally, what if a small limited partnership had locked in guaranteed contracts for this ‘reverse oil tax,’ all with the government’s approval, for 10 long years?

“It would be an amazing deal, wouldn’t it?

“And here’s the kicker: This unprecedented, once-in-a-lifetime opportunity is happening right now, as we speak.

“Already, a small group of savvy insiders have cashed in with regular payments before the upcoming ‘reverse oil tax’ has even gone into effect!”

Don’t worry, that bit about it “beginning May 17” doesn’t mean that it’s too late to catch on with this “top secret” deal — though I’m afraid this was also one of the more heavily-covered pipeline deals in the financial media, second only to the Keystone XL political debate, so it ain’t exactly a “top secret” anymore.

Why was it so heavily covered? Well, because this deal — though relatively small for the large companies involved — tells a story … and we all love stories. The tale is that US oil production in North Dakota and Canadian production has grown so fast that it has messed up the oil transportation network … pipelines were set up to bring imported oil from overseas in through Texas and Louisiana, not to bring crude oil from the Bakken or the oil sands down to the Gulf Coast where most of the refineries are. That increased production of oil from new places in North America has led to a glut of oil in Cushing, Oklahoma where NYMEX oil prices are set (ie, when they trade oil on the NY Mercantile Exchange, which is the “West Texas Intermediate” oil price that you hear about on the news, the prices are set for delivery in Cushing). So oil prices there are relatively lower than international prices. International prices are set off of a benchmark called Brent Crude, which is North Sea oil but has been widely adopted to mean all seaborne oil that gets traded and delivered by tanker. Oil is largely fungible, meaning one barrel is more or less the same as another (there are variations, with refineries set up to handle specific types, and that messes up the liquidity of the market a bit, but we’ll ignore that) — and since it’s fungible and easily transported by a massive global network of tankers, import and export facilities, and pipelines, you would expect the major seaborne price to be roughly the same as the price in the heart of the world’s largest oil consumer and importer.

A part of the reason why that’s not the case is the roughly 500 miles between Cushing, Oklahoma and the refineries in Louisiana and Texas that are near the Gulf of Mexico, a gulf of space that is underserved by pipelines (or at least, underserved by pipelines that move stuff South — pipelines don’t generally have two lanes, they move in one direction).

So the big story that caught the attention of investors who are interested in this “gulf” between Brent Crude prices and WTI prices was that one of the pipelines that was set up years ago to move oil from the Gulf import terminals into Cushing is getting the switcheroo — they’re changing the direction, so that more oil from Cushing can instead move to the Gulf, so theoretically the refineries who might have had to import Brent Crude at $100 using a Gulf terminal can now buy WTI from Cushing instead for $86 and move it to the Gulf via pipeline.

And yes, it’s already happening — it’s a story today, too, in fact, because the first load of oil that was put into that pipeline (it’s called the Seaway Pipeline) 19 days ago just arrived today at the terminal in Texas (interesting math: that means the crude oil took almost three weeks to travel 500 miles — don’t know if that’s the normal speed or is a startup thing, but that’s just slightly over one mile per hour). That’s obviously not enough to immediately relieve the price imbalance that’s largely caused by huge inventories in Cushing, but just the announcement a few months ago that this would happen (and that the government will also likely approve the southern part of the Keystone pipeline extension to begin construction soon, driving more Cushing oil south) did help to narrow the ridiculously high spread between Brent Crude and WTI Crude that we saw last year.

So what’s the investment case here? Well, there is high demand for this pipeline and the price has been initially approved at $3.82 per barrel for that transport … though they could have probably gotten more for it, at least in the near term, if they’d gotten regulatory approval to charge “market rates” for what is close to a monopoly service (the regulators denied that request but approved the $3.82 rate), but it’s also true that most of this capacity, one expects, is going to be sucked up by long-term contracts from a few big refiners and there won’t be a windfall from “spot rate” buys for transport. Especially not for the very large companies who own this pipeline.

And it’s those very large companies — OK, not companies but partnerships — that are being teased by Money Map. The Seaway pipeline is actually a joint venture, 50/50, between Enbridge and Enterprise Products Partners. Enbridge Energy Partners is the biggest mover of oil from Canada into the US through their midwestern pipelines, Enterprise Products is a huge partnership (far larger than Enbridge — Enterprise is the world’s largest publicly traded partnership, I think, definitely the largest US energy MLP) that specializes in midstream services and natural gas liquids. So is Money Map Report urging us to buy units in one of these partnerships?

Well, it sounds like it — here’s how they make the math sound for you:

“For the first and probably last time, ordinary Americans can get a percentage of a fixed per-barrel ‘reverse oil tax’ based on an initial estimate of 54.7 million barrels of oil per year.

“At $3.82 per barrel, that’s $208.9 million in gross revenues alone… and that’s just the beginning…

“In the next few years, the amount of payments could more than QUADRUPLE…”

There’s a basis in fact here — the initial capacity of the pipeline is about 150,000 barrels of oil per day, which would be 54.7 million barrels per year. And they are going to substantially increase that capacity — they believe that their enhancements to the pipeline, including pumping stations, will bring capacity to 400,000 barrels per day within a year, and they have plans to construct a second pipe along the same route that they think can be completed within about two years, adding another 450,000 barrels per day. So yes, revenue could quadruple if the rates remain consistent. Still, even for the smaller partner on this pipeline that’s a nice boost but also, in some ways, a drop in the bucket — Enbridge has revenue well over $8 billion a year right now. So growth is good, more money that can be distributed to unitholders is good, and that’s what keeps MLP investments rolling and growing, but it’s not going to mean that the shares of either of these stocks double because of the Seaway pipeline.

In case you’re running low on exclamation points, here’s one more bit of the spiel from Mike Ward, Money Map’s publisher:

“Now, this small group of partners doesn’t get all of that. In fact, they have to split 50% of the revenues with a gigantic company. But at 150,000 barrels per day, that’s still $648,000 per day or $19 million per month.

“Imagine getting YOUR share of that!

“Imagine a tidy flow of CASH right into your brokerage account – your share of the “reverse oil tax!”

“And here’s the kicker: 150,000 barrels per day is just the start.

“When the big company and small partnership that jointly own this pipeline get up to speed, the pipeline’s capacity will increase to 400,000 bpd in the first quarter of next year. That’s $1.7 million per day or $51 million per month.

“And even that is only the start!

“The company is planning on DOUBLING the capacity of the existing pipeline, raising it to 850,000 bpd by mid-2014.

“That translates to about 16.5 million gallons of gasoline every 24 hours… nearly 8% of the entire U.S. daily demand.

“With a ‘reverse oil tax’ of $3.82 per barrel, the company is looking at gross monthly revenues… from this one pipeline… of more than $100 million.”

So yes, since they say here that they’re recommending the smaller partner in their “Top Secret Dossier,” that means they must be suggesting you buy units of Enbridge Energy Partners (EEP).

This Enbridge partnership has a market cap of about $8 billion, and annual revenue of roughly $8.5 billion, of which something like $650-700 million trickles down to unitholders in the form of distributions (MLPs call their shares “units” and their dividends “distributions”). They are actually in the middle of some pretty aggressive expansion (a lot of which is done either with debt or by selling additional units, or both, since they can’t reinvest much of their earnings — earnings have to go to unitholders in order for them to remain a tax pass-through partnership, which is the real advantage of the MLP structure).

So the upshot for us is that this is one of the largest MLPs, in the top half-dozen or so, and though they have some big natural gas and NGL (natural gas liquids) transport and collection businesses, including a solid position in the emerging Granite Wash area, it is also pretty heavily weighted toward Canadian and upper midwest crude oil transport. And right now, it yields about 7.5% and that distribution will probably continue to climb as their capital investment growth programs turn into more revenue.

Interestingly enough, though, they are over the “incentive distribution” level already — so parent and General Partner Enbridge (ENB) will get more of the proceeds going forward. Incentive distributions are set up to incentivize the general partner, which is the operator of the partnership, to continue to grow the partnership — in this case, dividends a couple years ago jumped over the incentive limit so the general partner gets half of any distribution increase above roughly $1.75/year (the current level is well over $2 per year). That’s not necessarily terrible, it just means they can’t grow distributions to ordinary unitholders (limited partners like you and me) as quickly as they would otherwise be able to. ENB is far larger and more diversified and pays a decent dividend too, but they are not nearly as dividend-focsed as the MLP (ENB yields a bit over 3% — you can see all the variou Enbridge entities here, with 2011 numbers, and the ownership chart for the MLP stuff here).

And if you’re interested in the Enbridge MLP, I should also let you know that Enbridge is one of the few MLPs that also offers a non-MLP option that carries similar tax benefits and is simpler to own (the only other one I know of is Kinder Morgan, with KMP and KMR). The basic MLP is ticker EEP, and you get your distributions in cash and get an annual partnership form (K-1) and owe taxes on the income portion of the annual distributions; the non-MLP version is a limited liability company that owns shares of EEP, that’s called Enbridge Energy Management, ticker EEQ, and it provides distributions at the same level, but in the form of additional units.

So if you don’t want the partnership tax forms or you want a potentially easier way to hold a piece of this MLP, and you would have been reinvesting your distributions into new shares anyway, the non-MLP version that doesn’t require dealing with a 1099 or a K-1 every year might be up your alley. The end result is similar, particularly for those who were going to reinvest distributions each quarter, and it effectively means that, just as with most MLPs, you get a tax deferral benefit (the bulk of taxes due on an MLP or on one of these hybrids like EEQ comes due as capital gains when you sell, the distributions along the way reduce your cost basis instead of creating a current-year tax liability). That is the idiot’s version, to be sure — I am not a tax expert, nor do I own any of these investments, and I can’t promise that I’ve described the tax situation properly, so if you do decide you want to own one of these please make sure to understand the tax implications first (particularly if you hold MLP shares in a tax-deferred account like an IRA, which in some cases is wasteful — since these entities are tax-deferred anyway — and in some cases, particularly with large holdings, can create unexpected tax problems). It used to be that you could buy these non-MLP entities at a discount to the larger MLP, but that relationship has flipped these days — EEQ is slightly more expensive than EEP and thus has a slightly lower expected distribution yield.

And that’s about all I’ve got for you today — the play on the Seaway Pipeline being touted by the Money Map Report folks is clearly either Enbridge Energy Partners (EEP) or Enbridge Energy Management (EEQ), and that one pipeline will be a profitable business operation for Enbridge but isn’t going to make them shoot out the lights over the next year. Still, it’s a solid MLP and it has a strong general partner and it yields 7.5%, which is above average for large pipeline MLPs. Why does it yield more than some? Well, investors are probably a little worried about their expansion plans, exposure to natural gas collection in some areas, and about the Keystone pipeline expansion bringing some competition eventually, along perhaps with some worries about their relatively small expected liabilities for their pipeline spill in Michigan two years ago … oh, and revenue growth has disappointed lately, including some quarters when revenue actually dropped, so in some way’s it’s a turnaround story that depends on their capital investment plans to re-juice revenue growth.

So … it’s at least worth chewing on for those looking for some relatively high income and a pretty stable distribution — give it a nibble for a while, see how it tastes as you get past the crunchy outside, and let us know what you think and if you want to buy in. That’s why we have that friendly little comment box below, after all, we want your opinion and we often find that reader comments add more to our understanding than a few pages of Gumshoe blatheration did … so have at it!

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Thanks Travis, I own it already and have noticed it’s sitting on strong support at 28.50 and was thinking of adding to the position by selling a July put. It’s optionable, and it’s possible to get a good fill on a limit for a sold call, adding to the yield. The October 30 put is asking $2.60, another way to add to a position and/or net a premium. I love reading your work; my patience wears thin with the goofy titles and convoluted logic of some of these guys. Great explanation on an article I couldn’t read to the end… Read more »

Hi Travis,
I too have owned EEP for 13 years and have found the return quite satisfactory. A high end tax program is a big help for proper reporting. One caveat: They report income in a number of states, and it may be necessary to file returns in many of them [my holding is small enough to keep me under most of the thresholds fortunately], though state reporting is usually simple enough for non-residents to a separate program unnecessary.

HI Travis great work – but these guys are month’s behind the curve – all this was described in WSJ months ago complete with maps of the various pipelines and all. I added these at the time Already own Kinder Morgan and LINN and Mark west (MWE) – all of which by the way send K-1 each year. But ONEOK Partners may be better than these – I will buy this summer when the market goes down a bit – ONEOK has the pipelines for the Bakken and related plays in ND and Montana. But it jumped too fast over… Read more »

Indeed — and, of course, the basic idea of MLPs is nothing new and that’s what they’re really teasing … this particular pipe won’t make a particularly shocking difference to their performance, though Enbridge is certainly more levered to the “Canadian oil to the US” trade than most. Most of the big MLPs ($5-10 billion and up in market cap) are pretty well diversified and much easier to take than some of the riskier, smaller partnerships that might be a bit more levered to one specific area.

Hi, as a subscriber I’d like to request that you do not put anything on Facebook that you haven’t put here first. There are folks whose employment or personal situations put them outside Facebook, and it would be sad to think that a paying subscriber is missing something that a random idiot Facebook user is getting for free.

What I post on Facebook are the links to articles on this site and occasional links to other articles that I find interesting but didn’t write. No deep analysts or long form comments that you’d really miss, I’d guess, but there may also be a way for us to include that stuff here on StockGumshoe.com, I’ll look into it.

Travis, I too want to thank you for all your info. I am probably one of those idiot random Facebook users that Jeff Clark refers to since a stroke a few years back destroyed a lot of my mental faculties and to this day I do not understand Puts and Calls but would sure like to sit down with someone and try to learn the process. Anyway, I also appreciate all the feedback from your readers as it helps me decide what stocks, etc., might be a good investment for me. As I am almost 75 years old, I don’t… Read more »

Anyone know what the tax implications would be investing in EEP if you live in Canada? Would we have to worry about US taxes and reporting or just report in Canada and let the U.S. -Canada Tax treaty take care of the withholding taxes, which become a decution in Canada?

Thanks for decoding this oblique nonsense. As I own EEB and EPD already, I have a limited patience for folks who speak out of both sides of their mouths. That is why Duke Ellington kissed Nixon 4 times, Duke thought he was 2 faced!

“….the first load of oil that was put into that pipeline (it’s called the Seaway Pipeline) 19 days ago just arrived today at the terminal in Texas (interesting math: that means the crude oil took almost three weeks to travel 500 miles — don’t know if that’s the normal speed or is a startup thing, but that’s just slightly over one mile per hour) That’s obviously not enough to immediately relieve the price imbalance that’s largely caused by huge inventories in Cushing….” One MPH seems correct, and here’s the math: A standard pipe having 36 inch outside diameter pipe and… Read more »

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